Our own thoughts continue to evolve and we share with you our current thinking. We hope to continue our dialogue with you, in order that together we can establish a model that promotes the consumer interests and welcomes the initiatives that professional advisors have established and are considering.
As you may be aware, in January 2003 Advocis commenced operations as the merged association of the Canadian Association of Financial and Insurance Advisors (CAIFA) and the Canadian Association of Financial Planners (CAFP). The legal name of Advocis is the Financial Advisors Association of Canada.
Our association traces it origins to the founding of the Life Underwriters Association of Canada (LUAC) in 1906. CAFP was founded in 1981. As its predecessor organizations have, Advocis continues to serve the Canadian financial advisors community and their clients. Our 16,000 voluntary members are financial advisors licenced to sell life and health insurance, mutual funds and other securities.
The objectives of Advocis are to maintain proficiency standards through educational programs, to uphold standards of market conduct through the enforcement of a Code of Professional Conduct, and to participate in the development of policy and regulation affecting financial advisors and their clients.
Our current view is that Canada needs more harmonized national securities regulation, preferably a system integrating the insurance and security regulatory regimes. Advocis believes that the regulation of financial intermediaries, who work in the retail market, should be more fully harmonized and ultimately integrated. At the same time, we favour a regulatory system that facilitates more cross-jurisdictional mobility for financial intermediaries.
For example, we have recommend that the proposed National Producers Database be expanded to include insurance licencees as well as securities registrants. Such a national integrated data base system would reflect the convergence of distribution channels in the financial services industry, assist regulators and compliance officers in the advancement of consumer protection and facilitate cross-jurisdictional mobility.
As progressive as your thinking may be with reference to the current regulatory paradigm, without the considerations that we have outlined in the attachment, we feel that the current model is limited because it focuses on a transactions-based model, rather than considering the nature and role of advice in the support of consumers. Simply put, we are suggesting that incorporating professional designations and the associations that support them within the securities regulatory model establishes a direct accountability between the consumer and the individual providing advice. This accountability would be established by embedding appropriate designations as a requirement to "hold out" the ability to offer prescribed advice -- that is to say advice in the areas of portfolio management, complex investing, financial planning and advanced life underwriting.
We are concerned that financial intermediaries that do not belong to an industry association will essentially "fall through the cracks". In our view, the best way to ensure that this does not happen is for all intermediaries to earn one of several approved designations, within a certain time period after they begin their practice.
We would like to stress that in our model the education entities - particularly the FPSC, Canadian Securities Institute and the CLU Institute should have one singular focus - the maintenance of the standard for those who hold out that they are qualified to give advice in the respective areas. The associations that provide member services or promote member interests should have discrete mandates. None of the parties in the industry today need be disadvantaged by such a shift. It is merely necessary that a group such as yours, which has already demonstrated its leadership interests, take the further step to partner effectively with those associations.
Advocis members have adhered to a code of professional conduct for many years. A series of "Best Practices" manuals is currently being developed by Advocis to encode the elements of regulatory compliance and define such generally accepted practices that would serve as the application standards for investment advice, financial planning and insurance underwriting. We believe it is through such a body of knowledge, widely recognized within the industry, that true references of appropriate, consistent compliance can be upheld. We are at the early stages, and the project will pick up steam as we go and the industry recognizes the true depth and benefit of our efforts. In these manuals, we have taken the approach that we will set out not only what advisors "must do" (regulatory compliance) but also what they "should do" if they want to practice at the highest level. Furthermore, these codified practices provide a means of objectively evaluating practice readiness and continuing education requirements.
The fundamental element in the advisor-client relationship is the letter of engagement and disclosure. This document clearly sets out what services the client is to receive, whether any conflicts exist and the method and amount of advisor compensation that will be employed. A significant portion of the manuals is devoted to this topic. Advocis would be pleased to provide copies of these manuals to the Wise Persons Committee as they become available. What we would prefer, however, is that your committee consult with us as to how to leverage the higher standards that Advocis members have already committed to rather than trying to regulate them through a lower common denominator.
What in your view are the key strengths and weaknesses of the current structure?
Advocis is of the view that the current securities regulatory model is fundamentally flawed because it is transaction-based and dealer-centric and should be more balanced in terms of the dealers' and advisors' interests.
Our proposal is to achieve this balance and advance the public interest and investor protection by establishing criteria for sale intermediaries who hold out as financial planners and for insurance advisors, who hold out an expertise in advanced areas of insurance-based practice. Recognized private sector designations provide a natural basis for the regulation of licensees who hold out as financial planners or as competent to advise on highly complex life insurance products and estate planning strategies. Advocis has established a widely-respected designation, the Chartered Life Underwriter (CLU), and the Financial Planning Standards Council has established the Certified Financial Planner (CFP). These designations form the basis of acceptable holding out requirements that may be used by individuals, who satisfy defined criteria for initial and continuing technical proficiency, generally accepted practices and ethical conduct and submit to sanctions for non-compliance.
A key element of our proposal is the holding out provisions. If such provisions could be embedded within the legislation across all disciplines that apply to financial advisors, our ability to promote our members' professional stature would be enhanced. For example, our preliminary view is that five categories and the accompanying definitions could be used:
· Estate Planning - Person who advises an individual on his or her overall estate planning including life and critical needs insurance. This person may or may not sell these products to the consumer.
· Complex Investing - person who is registered to trade in securities and who has been given discretionary authority to buy and sell securities on behalf of the client
· Financial Planning - person who provides objective, integrated, comprehensive advice based on an assessment of an individual's current financial situation and current and future financial needs
· Portfolio Management - persons or companies who manage the investment portfolio of clients through discretionary authority granted by the clients
· Retirement Planning - Person who works extensively in projecting future needs, sources of income and pension options.
· Comprehensive planning - Person who provides advice in the area of financial planning, estate planning and risk management
Our designation-based model has been designed in light of the fact that such professional designations can be used to maintain specific levels of proficiency. Continuing education, although laudable in concept, has not worked in principle. A designation-based approach is a better way to maintain a certain level of knowledge and generally accepted practices and to ensure continuing practice qualifications.
The Advocis model is superior because it protects the consumer against injury in the first place by increasing the accountability of the advisor. In other words, the current model results in restoring an injured consumer when the preferred model would be to protect the consumer by putting liability on the advisor. Our model calls for higher competence, professionalism and accountability from a segment of professional advisors who can hold themselves out under a professional designation such as a Chartered Life Underwriter (CLU) or a Certified Financial Planner (CFP) and benefit from doing so. The Advocis model ensures that the consumer is protected in terms of simple product sales.
With respect to one of the most recent regulatory initiatives, the promotion of the Uniform Securities Legislation (USL) by the Canadian Securities Administrators (CSA), the umbrella group that represent the provincial securities commissions, Advocis believes that the USL should be more focused on the representative rather than the dealer. CSA has indicated that such changes may be part of the second phase of securities reform but has admitted that this second phase may not be implemented for five to eight years. We are concerned that even if this issue is addressed during the second phase our members will continue to be at a disadvantage for some time since our members will continue to operate under a predominant dealer or corporate compliance model rather than as a independent practitioners. The Act, therefore, will continue to treat the professional advisor as an employee, an approach against which Advocis has actively lobbied for many years.
Our preferred approach is to assign product responsibility to the manufacturer as in the insurance realm and advice-giving responsibility to individuals appropriately qualified to give it. Another approach would be to allow advisors to become one-person dealers, who would be subject to the appropriate capital adequacy (lower than the dealers) and audit requirements. We could then distinguish between "securities dealers", which are regulated by the IDA and "broker dealers"/ "collector dealers"/ "independent direct dealers", who are entry level or minor level players. "Broker dealers"/"collector dealers"/ "independent direct dealers" could be defined as sole practitioners, in partnerships with other dealers, an employee of a mutual fund dealer/securities dealer, insurance company and/or bank dealership. They may not trade directly on the stock exchange and may have to jitney their trades through a security dealer. They can sell mutual funds and other off-book investments such as tax shelters and limited partnerships.
Current regulations interfere with the ability of the professional advisor to serve his or her clients through an integrated financial services firm that offers insurance and securities products and advice. These regulations subject advisors to unnecessary complexity and expense and sometimes result in security and mutual fund dealers intruding into the business affairs of the advisor. In fact, there have been instances where the dealer has taken advantage of its regulatory authority to compel the registrant to direct non-securities business to the dealer. We have referred to such practices as "predatory regulation".
The other issue affected by the current regulatory regime is lack of client mobility, where the advisor, once registered with a dealer, can only transfer his or her clients to another dealer with prohibitive delays, cost and paperwork. No such restrictions interfere with the ability of one dealer to transfer the same book of clients to another dealer. We are supportive of a model that would ensure client mobility, whereby the representative's ability to transfer clients would be governed by a contractual arrangement with his/her dealer and advisors. Our members have been promoting the issue of greater client mobility to the BCSC and there seems to be some acceptance on the part of the BCSC to consider this matter further.
How well are enforcement activities related to capital markets in Canada? Does the present securities regulatory structure enhance or diminish the effectiveness of enforcement? What are the key enforcement issues?
The model that Advocis is proposing enhances consumer protection since it sets a standard to measure both proficiency as well as conduct. Advocis seeks to maintain a high standard of professionalism in the financial advisors industry. Currently, Advocis members are required to abide by a Code of Professional Conduct (CPC). The CPC sets out principles of professional behaviour expected of each member.
To date the practices that form the basis of appropriate conduct are vested in the inconsistent compliance practices of the dealers. Advocis will call upon broad-based industry participation to establish ground rules and practices, similar to acceptable accounting practices, that form the basis of acceptable client services and protection. In order to uphold the CPC, Advocis follows a publicly available set of disciplinary procedures. The disciplinary procedures set out a transparent and consistent process for investigating allegations that a member has failed to abide by the CPC and impose appropriate sanctions where it is determined that a member has displayed unprofessional conduct. The Advocis disciplinary procedures are based on the concept of peer review. In this way, members are accountable to one anther for their professional conduct.
Regulators and politicians may view the current regulatory regime as acceptable as long as there is disclosure. Disclosure is effective only if consumers are sufficiently educated to understand the information that is being disclosed. Sadly, there are not that many consumers that have acquired that level of knowledge and there are few sources of unbiased investor education information.
The other important aspect of investor protection is that the advisor, as well as the dealer, should have adequate insurance coverage. Unfortunately, because the insurance products are supplied by companies that have a vested interest in increasing costs and decreasing coverage, the advisor is forced to assume less insurance coverage that would otherwise be in the best interest of the client. The dealers are using this aspect of their practice as a way of relationship building with the client. Consequently, this situation restricts the mobility of the advisors and, in some cases, forces them to adopt practices that are in the interest of the dealer, instead of the client.
How does Canada's regulatory system affect the international competitiveness of Canadian capital markets and the Canadian economy?
The increasing cost of regulatory compliance reduces the overall competitiveness of the Canadian capital markets. These costs have had a detrimental impact on advisors and it is for this reason that we believe that, at the very least, there should be a harmonized model which provides a level playing field for financial advisors across Canada. Our members are concerned that they have very little influence over these rising regulatory costs and are hoping that your recommendations result in lower regulatory compliance costs.
How does the current regulatory structure affect your costs of complying with securities regulation? How have recent initiatives by the Canadian Securities Administrators affected these costs? Are there other efficiency issues?
Our members have seen their costs escalate during the last several years, especially with the implementation of the MFDA. With the introduction of the MFDA, regulatory compliance costs have been passed through from the dealers to the representatives, with no official way for the advisors to express their concerns since the advisors are not represented on the MFDA board. Advocis is currently working with the MFDA to permit greater representation from the advisor community.
Our members are also concerned about the increasing power of the regulators and their efforts to increase their influence. For example, the OSC Five Year review that was recently sent to us for comments recommends that the OSC be given "basket rule making" authority that is "substantially identical to that conferred on the Lieutenant Governor in Council". Such authority would enable the OSC to make rules on matters not contemplated by the legislature in the Act, which would constitute a substantial increase in power.
Another OSC five-year review recommendation requires that in the case where a proposed rule is sent to the Minister of Finance and is not approved, the Minister must make public the names of those raising concerns and the nature of the concerns. Such a rule would cause anyone who has legitimate concerns about the regulatory system to have second thoughts about coming forward to voice those concerns. Such a rule would enable the regulators to essentially silence any dissent to new rules.
Are there regional and local characteristics of capital markets across Canada that affect you? What regional and local requirements are met by the current structure and how? In particular, do small and medium sized companies have unique needs and how does the current regulatory structure accommodate these needs?
Regional and local markets do have different characteristics. Advocis members have strongly enforced this point in many forums that have been held to discuss regulatory issues. Our current view is that Canada needs more harmonized national securities regulation, preferably a system that would integrate the insurance and securities regulatory regimes. Our members, however, have emphasized the importance of accommodating regional differences. Advocis believes that the regulation of financial intermediaries, who work in the retail market, should be more fully harmonized and ultimately integrated. At the same time, we favour a regulatory system that facilitates more cross-jurisdictional mobility for financial intermediaries.
How do you perceive the timeliness, responsiveness and flexibility of the current system and where necessary, in revising or simplifying them to meet new circumstances.
The current system is not very timely or flexible. Advocis has been pressing for numerous changes to the current regulatory regime over the course of many years. For example, we have been talking to the CSA about changing the current provincial securities acts to enable registered salespersons to incorporate with the CSA but have made very little progress.
The current definition of a salesperson in the provincial securities statues restricts registration to an individual employee by a dealer and thereby precludes a dealer from contracting with an incorporated sales representative.
We, however, appear to be making some progress on this issue in British Columbia where the BCSC will be drafting new legislation over the next several months, which is expected to be approved by the provincial legislature by the end of the year. The British Columbia legislature has amended the definition of "salesperson" in their Securities Act to remove the restriction that a salesperson is employed by a dealer, cannot incorporate and cannot be an independent contractor. Although this amendment has received Royal Assent, it has yet to be implemented.
What is your assessment of regulatory structures in other countries? Are there lessons to be learned from other countries' experiences.
Advocis supports a securities regulatory system that will reduce regulatory costs, enhance consumer protection, simplify the registration process for financial intermediaries and improve multi-jurisdictional and client mobility.